Second Wave of Post-Soviet Opportunities
- Trekking For Alpha
- May 8
- 9 min read
Nothing has made us simultaneously as excited and disappointed as reading Bill Browder’s book Red Notice. The excitement stems from the unique opportunity Browder uncovered and took advantage of by being on the ground in a once in a lifetime market transition. The disappointment is from the realization that an opportunity of that nature may never happen again (and of course, the violence and persecution that his team faced).
In Red Notice, Browder was in the right place at the right time - he was able to see the chaotic, corrupt privatization process that state-owned enterprises (SOEs) were undergoing in post-Soviet Russia on the ground, in real-time. The danger and tribulations that impacted Browder and his team were tragic and must be acknowledged. But as an investor, it’s hard not to feel FOMO about how Browder was able to jump on such a huge shift taking place. Does another opportunity like this exist? Will it ever again?
While we missed the first wave of investment opportunities from the collapse of the Soviet Union as we were not even born yet, our meetings across the former republics (ex-Russia) revealed to us that there is a second wave of opportunities spurring from this geopolitical tidal wave. Whether it be at a breakfast meeting on the shores of the Caspian surrounded by meats, cheeses, and jams as far as the eye can see or at a coffee chat tucked in a corner of a cafe in the Genghis Khan Museum in Mongolia (Soviet aligned and culturally similar) or at an informal catch up over plates of steaming khinkali and frosty glasses of Kazbegi beer in Tbilisi… it became apparent that the former Soviet Republics are at an important inflection point for investment. While Browder was able to take advantage of the first wave of opportunities - crazy low valuations, an uninformed public ripe for buying on the cheap from, intense corruption - a second wave of opportunities is now up for grabs.
The second wave of Soviet opportunities comes with the rise of a new generation of business leaders. A generation which never lived in the Soviet Union. A generation intrigued by global financial integration, more comfortable with capital markets, more understanding of global business best practices, raised in the era of the internet, and in some cases educated in the West. While their parents were the first to set sail on the privatization journey, cultural headwinds stalled this voyage more than Western investors probably recognize. This leaves us today with a plethora of low-hanging-fruit and a generation hungry for opportunity and freer from the “Soviet mindset” that held their parents back. It also has created a cliff of businesses for sale as those who were early pioneers in the privatization push are reaching retirement.
There were 15 republics in the Federation and each is now at a different phase of this transition. States range from Estonia, which has the most unicorns per capita in Europe and has a GDP per capita of over $30,000, to Tajikistan which has faced years of civil unrest and is looking at a GDP per capita of $1,160. Political outcomes vary too from functional democracies to Aleksandr Lukashenko’s Belarusian dictatorship. In this post we are discussing states that are more at the “in-between stage” with a positive political backdrop.
Below we describe overhangs from the Soviet era and ways you can capitalize on this changing of the guards.
Catalyst for Change - Generational Shift
In the years following the collapse of the Soviet Union, there was a business boom – entrepreneurial individuals and corrupt officials alike scrambled to build businesses in the smoldering embers of the once great superpower. While business development was allowed, this initial onslaught of business leaders realistically knew very little about running a business. These newly crowned executives were more accustomed to waiting in bread lines or mastering the art of bribery than running capital raising campaigns and establishing internal best practices. In fact, most knew very little to nothing about the latter and were even deeply skeptical of some of this “capitalistic witchcraft”.
In the Soviet era, businesses did not need to raise money. They were funded by Mother Russia. The concept of business best practices - proper bookkeeping, boards, governance, etc. - was less serious and in the vast majority of instances, one was incentivized to improperly report, if it was even required at all.
While many of these business leaders have learned a lot about running a business in the last thirty years, old habits die hard. From deep skepticism about raising external capital to muted understanding of the importance of proper governance and bookkeeping, the first wave of corporate cowboys were deeply held back by their mindset and shallower global business education. While we reported on these dynamics in our piece on Azerbaijan, this is a tale we have heard repeatedly across the former Soviet republics we have trekked to.
Change is on the horizon though. As this first wave of entrepreneurs trade their offices for retirement on the shores of the Caspian or Black Sea, a new generation is coming to roost. Through our meetings, we could feel the change of energy. This cultural overhang was top of mind for the younger business leaders we met with - demonstrated through varying reactions ranging from an air of embarrassment about how their elders run some of the largest businesses in their country to salivation at the thought of the opportunities created from this impending transition. They are eager to be a part of this change and profit from it.
So where can one find opportunity from this transition? The dynamics create a large pool of uniquely underperforming assets finally in a position for change. On top of this, the collapse of the Soviet Union triggered a mass business generative event as many businesses were established in the years directly following the economic transition in the early 90s. As these founders retire, often with no next of kin eager to take over, a sizeable number of business owners are looking for an exit. These two dynamics together create a unique buying dynamic ripe with companies with significant value creation opportunities from operational improvements - improved internal controls and capital sourcing, etc. - in conjunction with the cultural shift required to get there.
Proof of Concept
Romania’s Success Story: Fondul Proprietatea
An interesting case study demonstrating the remaining alpha in the former Communist bloc is Fondul Proprietatea, a Romanian Alternative Investment Fund. The fund was launched in 2005 as a means to compensate Romanians whose properties were confiscated by the former communist government. It has evolved into a dually-listed (Bucharest and London) investment vehicle overhauling Romanian state-owned companies and has produced some eye-catching results. The fund was previously managed by Franklin Templeton.
The fund holds substantial minority stakes in several of Romania’s core energy and infrastructure companies, particularly those engaged in oil and gas and electricity generation and distribution. Significant shareholder value has been unlocked through cleaning up corporate governance and formalizing these state-owned companies which have been in tatters since the communist era.
Results: Since the start of the calculation of the Fund’s performance until YE 2024, the NAV total return was 386.0% (~28% IRR), while the total return for local shares was 639.5% (46% IRR), and 188.1% (~20% IRR) for the GDRs. In 2023, Fondul IPOed Hidroelectrica, Romania’s largest producer of electricity. At $1.8 billion, this transaction marked the largest IPO in Europe in 2023. In addition to impressive returns, the fund raises global awareness about investing opportunities in Romania. Hidroelectrica trades on the Bucharest bourse bringing more prominence to this smaller, Eastern European exchange.
Uzbekistan: A Next Frontier in the Works
For nearly three decades after the fall of the Soviet Union, Uzbekistan largely remained an economic hermit kingdom, fairly unchanged from its Soviet days. Following the death of Soviet-era autocratic leader Islam Karimov, that all began to change. In 2017, newly elected President Shavkat Miriyoyev commenced an ambitious reform program striving to liberalize and privatize the economy, attract FDI, and accelerate economic growth amidst a backdrop of societal reforms. This included opening up the country for tourism which is why all of a sudden it may feel like all of your friends are in Samarkand.
Since the reforms commenced, foreign direct investment inflows have surged 86% (2016 to 2023), 1,200 small- to medium-sized SOEs have been sold, the number of businesses registered in the country has tripled and the economy has experienced ~6% annual growth (2018-2023). However, there is still a lot of wood to chop as the economy remains dominated by SOEs and reforms have been slower to materialize than expected.
As a means to turbo charge privatization efforts, the government of Uzbekistan announced a partnership with Franklin Templeton to manage the National Investment Fund of Uzbekistan (UzNIF). UzNIF consists of minority stakes (up to 40%) in 18 of Uzbekistan’s most important SOEs including Uzbekistan Airways. The package is estimated to be valued at ~$1.7 billion (link). To unlock significant value and attract foreign investors, Franklin Templeton will strive to root out remnants from the Soviet era - lack of proper accounting, corruption, perverse incentive alignment, etc. A core mandate for the initiative will be to list UzNIF on a leading international stock exchange (ideally London), in order to attract more foreign investors, and the Tashkent Stock Exchange. They are targeting Q1 2026 for both listings. The Uzbekistan government hopes lightning strikes twice and that Franklin Templeton can attain success similar to that experienced in Romania.
Additionally, Uzbekistan is demonstrating positive cooperation with the Trump administration. Uzbekistan was the first country to fund repatriation of their illegal immigrants from the U.S. Positive interactions with the Trump Administration in addition to Uzbekistan’s natural resources - such as gold, uranium, copper, tungsten, and molybdenum – and strategic geopolitical location may position the Central Asian nation well for future economic cooperation with the United States. Stronger ties serve to offer mutually-beneficial opportunities for both nations.
Building Capital Markets: The Embrace of Savings and Investing
The above mentioned cultural mistrust of financial institutions not just constrains private businesses, but also impacts personal financial best practices. Many we spoke to described how their parents’ generation had a skepticism of capital markets which led to an over-indexing into real estate and holding cash under the mattress. Just go to Tbilisi or Yerevan and you can see this. Everyone’s disposable savings are tied up in cement apartment buildings and/or cash.
This is in contrast to the next generation. Young professionals desire options to store value and grow wealth beyond the old apartment building their parents bought. Despite this desire, there remains a lack of savings and investment options in these economies for the retail investor.
So How Can You Get in on this Opportunity? Whether you’re an investor or entrepreneur, below are a few ways you could capitalize from this generational shift:
Public Market Investors:
While we are still skeptical of the ability for these countries to create robust exchanges domestically, we believe foreign listings are a way for public investors to partake in increased capital markets activity in these economies. There are a few companies listed on developed exchanges which offer exposure to tailwinds.
Georgia: Georgia Capital (CGEO.L) is a publicly-listed (LSE), Tbilisi-based private equity fund manager focused on scaling and developing middle-market businesses in Georgia.
Uzbekistan:
Upcoming listing of UzNIF – foreign market listing TBD (2026)
Navoi, the world’s fourth largest gold producer, is a state-owned asset. An international listing has been explored and the Company is seeking a valuation of $10bn+.
Mongolia: In September 2023, the FTSE added Mongolia to the "Frontier Market” classification. No stocks have been added to the index yet, but they are expected to be added in the future.
Additionally, under an amendment to the Mongolian Banking Law passed in 2021, individual shareholding of systemically important banks is capped at 20%, requiring current owners to divest shares by the end of 2026. In order to facilitate this shift, Mongolian banks are working to list shares on international exchanges.
Romania: Fondul Proprietatea (FP.L)
Private Equity Investors:
As the second generation considers options for family businesses and as the “Soviet mindset” fades, we foresee an attractive target universe forming. Many of these businesses have been undermanaged resulting in stagnant growth creating a universe of businesses prime for revitalization. In meetings with investors, we have heard that many of these business owners are willing to accept a steep discount given lack of other options.
Business Opportunity: Savings / Wealth Management Platforms and Services
With the growth of savings and an embrace of capital markets, the next generation is looking for ways to store value and grow wealth. Across many countries we visited, we heard about demand for user-friendly, integrated platforms to enable saving and investing as this is still lacking.
Example: Kaspi Bank is a fintech success story in Central Asia.
Business Opportunity: Development of Services Firms (advisory, audit, investor relations, etc.)
A number of services firms from Western companies (Deloitte, McKinsey, etc.) have been entering these markets as more businesses look to become part of the formal economy.
Home grown firms are springing up to take advantage of liberalizing economies / potential interest from foreign investors.
Capital Markets Mongolia (CMM) is positioned as the ultimate source for investors interested in the country. The platform provides market news in English, hosts investor conferences in developed markets, and helps public companies host investor events / publish results.
We believe there is opportunity for firms like CMM outside Mongolia.